Wage increases should be limited to about 3 per cent per annum for the 18 months covered by the second half of the Sustaining Progress national pay deal, according to the latest commentary from the Economic and Social Research Institute (ESRI). Una McCaffrey reports
The economic think-tank's senior researchers argue that wage increases of any more than 4 per cent per annum would severely damage the Republic's competitiveness and limit economic growth.
The warning accompanied an upbeat ESRI assessment of the economy's prospects for this year and 2005. Gross Domestic Product (GDP) is forecast to grow by 3.5 per cent in 2004 and by 4.5 per cent in 2005.
The institute pointed out, however, that this level of growth would remain below the economy's full potential, and would thus put pressure on the jobs market.
The ESRI expects the unemployment rate to rise slowly from an average of 4.7 per cent last year to 5 per cent in 2005.
The institute's call for pay restraint comes as the Irish Congress of Trade Unions (ICTU) pushes for national wage increases based on anticipated inflation levels and productivity growth. Under the ESRI's forecasts for the economy, this would result in wage growth of about 4.5 per cent per annum over the final 18 months of the three-year Sustaining Progress agreement.
This final 18-month period starts on July 1st for most private sector workers, and on December 1st for public servants.
Talks began on Monday, with the employers' body IBEC arguing that wage growth must be based on a "common interest" of winning back "lost competitiveness".
"Four per cent is above the pale," said ESRI economist Mr Danny McCoy at the launch of the institute's spring economic commentary yesterday. "In our opinion it would give rise to competitiveness pressures."
Mr McCoy said "negotiation land" lies somewhere between the anticipated inflation level of about 2 per cent and an "upper bound" of 4 per cent.
He said the social partners needed to look at "the wider picture" when coming to a pay deal, arguing that both national productivity growth expectations and cost trends in competitor countries should be taken into account.
The ESRI's researchers believe that labour cost competitiveness will move into even sharper focus when the EU gains 10 new members in May. Mr McCoy also warned against basing pay claims on volatile industrial economic data which can be "seriously distorted" by flattering contributions from a handful of larger, multinational companies.
The ESRI's economic forecasts are based on wage growth of 2.8 per cent in 2005, which is the period under discussion at the pay talks.
Mr McCoy suggested that the Government could try to "bolster" a deal through tax measures such as taking the average industrial wage out of the higher tax bracket.
He called this "targeted deal-making support", but acknowledged that the public finances could not support large-scale tax concessions despite being in a "very sound position".
Mr McCoy expressed some concern at the soaring level of mortgage borrowing in the Republic.